An Unconventional Incentive

If you are looking for books that explore theories and logic that stretch beyond standard norms, Freakonomics can be an interesting place to start. Don’t expect a coherent book that sticks to one consistent central theme. In fact, this book is quite the opposite, a book that you can call an ‘offbeat’ read.

Levitt and Dubner
Steven D. Levitt and Stephen J. Dubner

Co-authored by Steven D. Levitt and Stephen J. Dubner, Freakonomics, to say the least, strays away from the conventional theories and explanations that we are accustomed to. They offer their own theories on causality for a series of events. To put it in simple words, these theories that sound ‘extraordinary’ at best, are examples of how an economist uses data and fact-based storytelling, instead of boring numbers and obvious assumptions to derive and present conclusions.

The book is covered in six chapters. Each chapter a case that begins with a result, and traces its cause to a completely inconceivable source. For instance, if you were in the USA during the 90s and regularly followed the news telecast, you would probably see a feature on the drastically reduced crime rates in different cities across the country. As expected, there were plenty of theories and reasons that were proposed to be the cause of this reduction. Reasons like stricter policing, stringent gun control laws, stricter sentences. All conventional reasons. All logical reasons. But unfortunately, all incorrect.

What then was the reason behind the drastic reduction in crime rates? Would you believe me if I told you that this reduction had its roots to a significant event almost 20 years prior? An event that has no direct relationship with crime? That is exactly what Freakonomics does. Levitt and Dubner explain how the reduced crime rates in the USA during this period, were less a result of the changes in laws aimed directly to curb crime, and more the outcome of a legalized abortion verdict from the Roe vs Wade case in 1973.

The impact of legalized abortions on reduced crime is just one of the theories from the book, that sets the stage for five more, equally remarkable cases. Interestingly, and not entirely surprisingly, Freakonomics is a book that can offend a lot of readers for different reasons. But what’s more interesting is understanding the logic and the reason behind the result discussed in each story. And the reason, it seems usually comes down to one aspect: Incentive. A motive or a reason to drive you to do something. We all know incentive as mainly a financial reward for an achievement. But have you ever considered what other incentives you can use to drive a desired behaviour? Or for that matter, what other incentives are being used to get you to act in a certain manner?

Although the authors are the first ones to admit that Freakonomics is not based on one central theme, ‘Incentives’ is one aspect that I found to be consistent throughout the book. And even though we are all aware of the concept of incentives, this book pushes you to think about incentives the financial rewards that we commonly tend to associate them with.

While talking about economic incentives, Levitt and Dubner also touch upon social and moral incentives. But two more kinds of incentives that Levitt and Dubner don’t talk about, deserve the same level of attention and appreciation – Coercive incentives and Natural incentives. Each of these incentives play an important role in our lives every day. Quite often, without us even realizing it, making their understanding even more intriguing.

The first and easily the most common kind of incentive, economic or financial incentive is what we see at play every day in the form of money or a material reward. It’s why we work hard, or at least try to work hard at our jobs – for a positive economic incentive of a salary. It’s why we follow traffic rules – to avoid the negative economic incentive of a fine. It’s how many infants are commonly taught to behave ‘appropriately’, with the promise of a positive incentive.

Then, there is the matter of social incentives – incentives that are linked to your desire to be accepted, liked and even perceived in a certain way among your social circles. Why else would you dress up in a certain way to work, another way on a night out drinking with friends, and a completely different way on a weekend family getaway? It is to ensure that you are seen in each of these social circles the way you wish to be seen. It is also why our manner of speaking may change depending on who we believe is hearing what we say. It is a social incentive that plays a large role in guiding your actions around a social group.

Finally, Levitt and Dubner briefly mention the idea of moral incentives, where a belief in ‘doing the right thing’ acts as a guiding principle for your actions. It is your moral incentive that stops you from cheating, robbing or harming anyone around you. While social incentives are based on your perception of what others think about you, moral incentives are based on what you believe in, irrespective of what others might think. Think about a group of protesters for a second, parading through the city with their slogans and messages written across large canvases. While you may think of them as a group of troublemakers, their thought of fighting what they believe is right gives them a moral incentive that is strong enough to overcome the negative social incentive that may be associated with it.

To avoid any confusion between social and moral incentives, let me quote another example. Have you ever considered how someone who follows the rules in broad daylight may behave when nobody is watching? Will he or she be just as law-abiding? It depends on the incentive that makes that individual follow the rules in the first place. Someone following the rules in the presence of a third person because of a social incentive, may not necessarily be the same when alone. Simply because of the lack of a social incentive. However, someone driven by a moral incentive will most likely continue to follow the rules irrespective of the presence or absence of a third person. It is his moral incentive, his belief in doing the right thing that encourages his actions at this point.

Coming to the first of the two kinds of incentives Levitt and Dubner do not mention, Coercive incentive is a relatively uncommon kind of negative incentive that can drive an individual to act in a particular manner, failure of which can lead to a physical force being used against him.

Perhaps the most important kind of incentive, depending on the way you look at it, is a Natural Incentive, where the driving factor behind your actions are completely internal. Another way of explaining this is that it is a self-driven motivation to do something, a kind of motivation or incentive that only the individual concerned can produce and fully understand. Learning, exercise, and living a healthy lifestyle are some of the common choices driven by an inner desire, a natural incentive.

There can always be arguments made about the actual incentive or reason behind any action. For instance, how someone ‘does the right thing’ can be argued to be less about a good intention, and more about ‘getting something in return’ or ‘being seen in a certain manner’ by his social groups. In other words, it is easy to justify an action driven by a moral incentive, to be rather driven by a social or even economic incentive. And there are certainly many instances where an individual will ignore an economic incentive in favour of a social or moral incentive. Or instances where he is driven by a combination of more than one incentive.

Incentives are today the proven mechanism to ensure people behave the way you want them to, just as they have been for a long time. Whether you are at work, at home, or at a social gathering, offering incentives always gives the receiver something to think about, and a reason to act. The tricky part is knowing what incentive you use, for whom, under what conditions, and to what effect. The answer is not a simple one, even when you’re dealing with an individual, let alone when you are trying to get a group to behave in a desired manner, as is the case for a school teacher in a class of 50 kids. Or for that matter, how does the manager of a football team manage to get all his players on the same page, to do what he wants them to do, every time they step on to the pitch? Even managers inside a corporate outfit need to deal with different forms of incentives, every day. How do they get everyone from their teams to stretch their efforts, hours and commitment beyond the norm, without necessarily offering an economic incentive?

A teacher, depending on the kind of students, may have to use an economic incentive in the form of a star for good behaviour, or a social incentive of the child being seen as a ‘good student’, or occasionally, even a coercive incentive of a cane that the student wants to avoid. All aimed at the same objective, of maintaining discipline in a classroom.

A manager of a football club usually deals with players of different calibres, ambitions and personalities, who behave differently to different incentives. And depending on the kind of personality, it may be a negative economic incentive of being benched or a positive social incentive of being recognized as a star that may become the manager’s tool in getting the best out of his players.

Similarly, a manager of an organisation may look towards an economic, social or even a moral incentive to get the best out of his team. Some of his team members may respond to an economic incentive of a financial rewards. Others may respond to the social incentive of being recognized across the organization. A third group may well respond to a moral incentive gained by doing their jobs well for a timely salary. And of course, there are always some self-motivated employees who need nothing more than a natural incentive in the form of their own backing to perform and exceed at any job.

Whether it is a school teacher, a football manager or an organisation’s manager, each of them makes the most of a combination of these incentives to achieve their goals. And this is probably not too different from how we, perhaps even without knowing it, use incentives, every day.

In turn, a good example of how incentives are used on us can be seen in brands, who offer us, as consumers, an incentive for every purchase that we make. Especially in today’s market, where customers are spoilt for choice, incentives have become more of an unsaid business mandate for brands, than a luxury for customers. Every customer who weighs one brand against another, is looking for an incentive for every penny he or she spends. It may be economic, social, moral, or even a combination of more than one incentive. Take the automobile industry as an example. A Honda offers its customers a valid ‘economic incentive’ over a Mercedes. But a Mercedes can just as easily offer its customers a valid ‘social incentive’ over a Honda. A Toyota Prius on the other hand, offers its customers a moral incentive of driving an environmentally-friendly car.

Perhaps this also explains why a brand that enjoys a reputation for its social work is proved to be preferred by many, over another brand offering a similar product or service. It is seen by its customers as a brand doing its moral duty, and customers feel morally satisfied by associating themselves with these brands.

Different brands can resort to using different kinds of incentives, to achieve different objectives. These depend not just on the products that they are offering, but more on the kind of customers that they are targeting to sell their products.

In many of the cases illustrated in Freakonomics, you will observe that economic incentives have played the most important role in influencing an individual’s decisions. There are however many cases, where social or moral or even natural incentives can have a bigger influence on an individual’s decision. This just goes to show that the same human being behaves differently in different situations, depending not only on the kind of incentives at play, but also the relative importance of each incentive. This may be why Levitt and Dubner don’t talk about which kind of incentive plays a bigger role in influencing an individual’s behaviour. Simply because one cannot say this for sure without knowing more about the individual being influenced.

Despite certain limitations, Freakonomics can be an interesting and revealing read, with insights into different kinds of motives and incentives, and the kind of impact they can have on individuals and even groups of people. And for a book published over 12 years ago, based on studies and facts that are even older, its principles and learnings still hold true, which is why you may want to give this book a read, even a second or third time.

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